Presentation Transcript

Asymmetric Information • Assumption: full information about the traded commodities • What about following markets? • Medical services: a doctor knows more than does a patient. • Insurance: a buyer knows more about his riskiness than does the seller. • Used cars: a car’s owner knows more about it than does a potential buyer • Problem: asymmetric information

Moral Hazard (hidden action) • With full car insurance are you more likely to leave your car unlocked? • With fixed hourly wage is your effort at work reduced? • Moral hazard is a reaction to incentives to increase the risk of a loss • A consequence of asymmetric information (hidden action).